Royal Caribbean Holdings (NYSE:RCL) is only about half as big as its rival Carnival Cruise Lines (NYSE:CCL). But as the market opened April 9, the market capitalization of RCL stock was two-thirds that of its larger rival.
The difference is in how Royal Caribbean has handled the pandemic.
Royal Caribbean was founded by the merger of three Norwegian shippers in 1968 and merged with Greece-based Celebrity in 1997. The company also owns a line called Silversea, a purchase completed just last July. It recently sold its luxury Azamara line to private equity. During the novel coronavirus pandemic, Royal Caribbean also closed a Spanish line called Pullmantur, which it hopes to relaunch under Spanish bankruptcy laws.
During the Pandemic
The Silversea and Azamara transactions hint at what Royal Caribbean did to meet the financial stress of the Covid-19 pandemic.
It’s true that, like Carnival, Royal Caribbean took on a lot of debt. Royal Caribbean reported net debt of $16.45 billion recently, up 42%. This sustains a cash burn of $250 million to $290 million per month while the ships are docked. It ended 2020 with $4.4 billion in cash.
During the pre-pandemic year of 2019, Royal Caribbean had revenue of almost $11 billion and net income of almost $1.9 billion. Like Carnival, Royal Caribbean was ineligible for last year’s big bailout. While based in Miami, its holding company is incorporated in Liberia.
To help clear its debt, the company held a $1.5 billion offering of new equity in March. The shares have already recovered from the dilution, opening April 9 at $90 each. The company raised another $1.5 billion in private notes at an interest rate of 5.5%. That money will go toward paying off debt due through 2022.
This gives Royal Caribbean a cash runway toward the relaunch of service. Unlike Carnival, it’s not so antsy it is threatening the leave the U.S. market. It has, however, resumed operations in other markets, where it is testing protocols like daily temperature checks. CEO Richard Fain said recently the lines had served 100,000 people since its international relaunch and seen only 10 Covid cases. When U.S. operations resume, vaccinations will be required.
Beyond the Pandemic
Royal Caribbean says it is seeing enormous pent-up demand for cruising, even when the ships return to the same place they left, as in Singapore. It hopes to return to service in the U.S. as early as July and on the west coast by November.
Until recently, the West Coast re-launch was set for mid-2022.
To maintain channel loyalty, Royal Caribbean also launched a $40 million “pay it forward” plan for travel agents, with three-year loans up to $250,000 to keep them operating.
The Bottom Line
During 2019, Royal Caribbean had $3.7 billion in operating cash flow. Its 78 cent/share quarterly dividend cost just over $600 million in 2019 and it had almost $700 million in free cash flow. Most of its stock is held by institutions and mutual funds, with just 27% held by private investors.
While Carnival is still controlled by the son of its founder, the RCL founding Wilhelmsen family in Norway sold its 12% stake in 2019.
Since the start of 2021, RCL stock is up 20%, against a 32% gain for its larger rival. Since the pandemic low of March 16, 2020, however, RCL is up 177%, which is nearly three times the gain of CCL. Delivery of new ships has been delayed, but almost 52,000 new berths are expected over the next five years.
If you’re going to invest in a cruise line, this is the one to buy.
At the time of publication, Dana Blankenhorn owned no shares, directly or indirectly, in stocks mentioned in this story.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.